Jeremy Warner's Outlook: Now there's a surprise. Government is being forced to suspend its fiscal rules
Saturday 19 July 2008
Just when you thought things couldn't get any worse for our beleaguered Prime Minister, along comes the news that he's being forced to ditch the rules on which he built his reputation as the Iron Chancellor.
On the face of it, this might not seem like much of a story, as it has been obvious for a long time that the rules were a busted flush. The public finances were in a bad enough state before Mr Brown even left the Treasury, but since moving into Number 10 he seems to have thrown caution to the wind, and in the manner of Labour leaders of old has taken to chucking public money around all over the place.
In the last three months alone, he's compensated those disadvant-aged by the abolition of the 10p income tax rate and abandoned a planned increase in fuel duties. As yesterday's public borrowing figures only too vividly demonstrate, he can ill afford such largesse. As things stand, he would either have to raise taxes, cut spending or both to meet his rules, thereby deepening what already feels like a serious economic downturn.
Few people will be discussing the end of the "sustainable investment rule" in the pub tonight. It is admittedly a somewhat dry old subject. But everyone will understand that getting rid of it is another humiliating blow to credibility for a politician who built his career around "prudence".
Leaking the intended climbdown now when everyone is about to go off on holiday might help defuse the full effect when the rules are formally redrawn in the pre-Budget Report next Autumn. It might also get people used to the idea that prudence as preached by Mr Brown is a luxury reserved only for the good times.
When the going gets tough, it gets suspended. What's more, if you are going to lose the next election anyway, you might as well go for broke, leaving the boy George to clean up the mess after the Tories sweep to victory. The Treasury can never quite bring itself to tell it as it is, so yesterday there was the almost laughable explanation that it had always been the Government's intention to review the rules after the economic cycle had ended.
If you had listened carefully, you would allegedly have heard the Treasury's chief economist announce the review to a parliamentary committee three months ago. Oddly, everyone must have been asleep at the time, as nobody noticed this somewhat significant admission.
Over the years, both rules have been manipulated to destruction in an effort to get the body to fit the corset. Every trick in the book has been applied to the purpose of allowing the Chancellor to announce in his Budget and Pre-Budget speeches that the golden and sustainable investment rules had been met. Now, with the economy deteriorating fast, the Treasury has run out of road.
The golden rule was in truth always a charade, since balancing the books over the cycle depends crucially on how you define the cycle. The Government has rout-inely been able to claim it was within the rule, as however much it borr-owed there would always be the opportunity to make it all back again in a cycle of indeterminate length.
Perhaps it is already too late for this Government, but the debate about what should replace these rules is already raging. The old Tory Party approach of aiming to balance the books in "the medium term" is a perfectly reasonable one if there is adequate independent monitoring and definition of the objective.
Clear objectives also need to be set for reducing public debt as a proportion of GDP. It is all very well for Mr Brown constantly to trumpet how Britain has got one of the best profiles in the G7 on public debt (actually Northern Rock has put paid even to that claim), but in the wider cohort of OECD nations, we are among the most indebted. With an ageing population, developed countries such as Britain ought to be aiming for no public debt or even net assets.
Equitable strikes blow for culture of compensation
Dusting off my mortgage endowment policy the other night, I was horrified to see that on current projections not only is it expected to fall short of the loan by about a third, but that taking into account everything I've put into it over the years, it hasn't even managed to keep pace with inflation. Frankly, I could hardly have done worse had I stuck the money under the mattress. By my calculations, this makes my policy an even worse performer than Equitable Life. If Equitable's policyholders have a case for £4bn of compensation, why not me, and the hundreds of thousands (possibly millions) of investors in other life funds whose payouts are also likely to fall short of Equitable Life equivalents? I shall be writing to Ann Abraham, the Parliamentary Ombudsman, to take up my case. She's done a remarkable job in arguing the unsupportable on behalf of Equitable policyholders, so I'm looking to her to take up the cause of everyone else too.
Only kidding. Regrettably, we cannot be said to be wholly in the same boat. Equitable Life was indeed different from other life funds which have also turned out to be dogs. The distinguishing feature was that Equitable contractually agreed bonus and guaranteed annuity rates which it didn't have the capital to pay when investment conditions turned against it. Other life funds which have performed equally badly or worse were able to meet their contractual obligations, either because the guaranteed payouts were not as big, or because they were able to find the capital from reserves or parent companies.
All the same, Equitable is not one of those cases where investors have lost everything and as a consequence are living in penury. The charitable case for compensation is non-existent, or even vaguely distasteful when you think about the number of other more deserving causes there are for taxpayers' money. Equitable investors have, in fact, lost no more than the rest of us on life policies sold on the basis of inflated expectations.
The legal case for compensation seems to me equally questionable. A bit like Northern Rock, Equitable was plainly run on an unsafe basis, but there was no fraud and for those who took the trouble to dig beneath the surface, the dangers were there to see.
Certainly, the regulators knew all about them. They chose to do nothing until it was too late first because they thought the courts would allow the society to wriggle off the hook of guaranteed annuity rates and later because they hoped to secure a takeover which would give Equitable the capital strength it lacked. With the benefit of hindsight, the Financial Services Authority obviously shouldn't have allowed Equitable to carry on writing policies when it knew they were being sold on the basis of a possibly false prospectus.
But in those days, it was a big thing to force a life fund to close to new business, and it might have triggered a crisis of confidence that would have harmed existing policyholders even more. Even accepting there was regulatory failure, the case for compensation still looks questionable. Equitable's new managers would have found it virtually impossible to sue the FSA for compensation through the courts, and indeed have failed in all the legal actions they have instigated to win recompense from others, including the responsible auditors and directors.
As a point of principle, it is wrong to hold taxpayers liable for compensation in cases of regulatory failure. It might be a different matter if a government organisation is directly responsible for a death or extreme financial loss. But to be held accountable for the mere act of regulating is not the same thing and if generally applied would lead to such oppressive "safety first" regulation in an attempt to protect the taxpayer from loss that it would stifle all innovation, enterprise and activity. Far from making people feel safer about saving, it would so diminish returns that they would give up saving altogether.
I won't be popular for saying these things, except perhaps among a few people at the Treasury, but someone's got to argue a bit of common sense. So policyholders in Equitable failed to get quite as much as they were promised. Big deal; join the club. Remember, it's not Government money that will foot the bill, but taxpayers', and I don't know why, but having already suffered on my endowment policy I'm not in the mood for paying up so that others won't.
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